Q4 2022 Quest Diagnostics Inc Earnings Call
Welcome to the quest diagnostics fourth quarter and full year 2022 conference call.
At the request of the company this call is being recorded.
Tire contents of the call, including the presentation and question and answer session that will follow are copyrighted property of quest diagnostics with all rights reserved.
Any redistribution retransmission or rebroadcast of this call in any form without the written consent of quest diagnostics is strictly prohibited.
Now I'd like to introduce Sean Delek, Vice President Investor Relations for Quest Diagnostics. Please go ahead. Please.
Thank you and good morning, I'm joined by Jim Davis, Our Chief Executive Officer, and President and Sam <unk>, Our Chief Financial Officer. During this call. We may make forward looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release.
Actual results may differ materially from those projected.
Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect quest diagnostics future results include but are not limited to those described in our most recent annual report on Form 10-K, and subsequently filed quarterly reports on Form 10-Q, and current reports on form 8-K.
For this call references to reported EPS refer to reported diluted EPS and.
And references to adjusted EPS refer to adjusted diluted EPS.
Any references to base business testing revenues or volumes refer to the performance of our business, excluding COVID-19 testing.
Growth rates associated with our long term outlook projections, including total revenue growth revenue growth from acquisitions organic revenue growth and adjusted earnings growth are compound annual growth rates.
Finally revenue growth rates from acquisitions will be measured against our base business now.
Now here is Jim Davis.
Thanks, Sean and good morning, everyone Quest had a strong year in 2022 with base business revenues growing more than 6% in the fourth quarter and 5% for the full year as we expected COVID-19 testing revenues decline, but still exceeded $1 4 billion in 2022.
Our strong performance over the last several years would not have been possible without the commitment and compassion of our nearly 50000 colleagues who rose to the challenge of COVID-19, while growing our base business I am incredibly proud of how this team has worked together during this unprecedented period in the lab industry.
To deliver insights to help create a healthier world.
This morning, I will discuss our performance for the fourth quarter and full year 2022, then Sam will provide more detail on our financial results and discuss our 2023 guidance in the fourth quarter total revenues were $2 $3 billion earnings per share were <unk> 87 on a reported basis.
Any dollar 98 on an adjusted basis cash from operations was $334 million for the full year of 2022 total revenues were $9 9 billion, including more than $8 4 billion in base business revenue.
Earnings per share were $7.97 on a reported basis and $9 95 on an adjusted basis cash from operations was $1 $7 billion.
As you saw this morning, we increased our quarterly dividend of approximately 8% to <unk> 71 per share and increased our share repurchase authorization by $1 billion.
Discussing additional highlights for 2022 I'd like to share. Some recent positive regulatory updates first Congress delayed Medicare reimbursement cuts under Pamela that were scheduled to take place in 2023, which would have impacted our revenue between approximately 80% and 85 million.
While we are pleased with the delay we continue to work closely with our trade association to seek a permanent fix to Panama.
Second CMS increased Medicare reimbursement for specimen collection fees for the first time in nearly 40 years. This could provide quest with a benefit of approximately $35 million to $40 million this year.
Regarding COVID-19 testing revenues, while we did see a steady ramp upward and COVID-19 volume throughout Q4, our volumes have steadily declined since late December we expect our COVID-19 revenues to be significantly lower in 2023 compared to 2022, we have.
Boward our prior COVID-19 volume expectations in 2023 from 10 to 15000 molecular tests per day to five to 10000 tests per day.
In addition, we continue to negotiate coverage and reimbursement policies with commercial payers. Following the end of the phe in May.
I will now share some recent highlights and how we are growing this business.
In the fourth quarter, we completed our acquisition of the outreach laboratory services business of Summa health, a large integrated health system, serving communities in northeastern Ohio.
We also entered into an agreement to acquire select assets of Northern Light Health outreach Laboratory services business located in Maine.
We will also provide professional laboratory management services for nine of Northern Lights Hospital laboratories, along with its cancer Center lab.
Our M&A pipeline is strong including potential deals with health systems small regional labs and other capability building assets in particular, the funnel of opportunities with health systems, which are facing major margin pressures due to labor challenges and mix shift from inpatient to outpatient care.
<unk> is very active.
Quest can help through lab management population health analytics, mobile services and or by monetizing their outreach business.
In health plans, we continue to gain traction with value based contracts, where we see meaningfully higher growth than with traditional contracts also we've started to benefit from incentives related to these value based contracts, which helps demonstrate the value of these strategic relationships.
Which CMS has reached an increase in Medicare reimbursement for specimen collections, we've begun discussions with our health plan customers about getting paid appropriately for the phlebotomy services, we provide to their members higher specimen collection fees enable us to make continuous investment in patient services. So their members continue to have that.
Broadest access to high quality and low cat low cost lab testing.
In advanced diagnostics, we generated strong double digit growth in prenatal genetics and pharma services in 2022.
In 2022, we also launched a solid tumor expanded panel as a laboratory developed test. There's 523 gene test relies upon the Illumina true site oncology 500 assay to help oncologists with therapy selection by providing comprehensive genomic profile profiling of the patient's tumor.
This test extends our capabilities beyond tissue pathology to offer faster turnaround time from cancer diagnosis therapy selection throughout 2022, we continued to make investments to strengthen our bioinformatics capabilities, which supports some of the faster growing opportunities of our portfolio like genomics.
Sequencing services prenatal and hereditary genetic testing in pharma services. We also invested in our women's health sales force, which will position us well for continued strong growth in prenatal genetics.
We continue to make progress executing our consumer initiated testing strategy last year, we recorded approximately $96 million of both base and COVID-19 consumer testing.
In the fall of 2022, we launched our new digital platform plus <unk> dot com consumers have found this to be a simpler more intuitive way to order lab tests.
Following the launch of our new consumer site, we began ramping up marketing spend through the fourth quarter. We saw some of the strongest order volumes to date following some cyber Monday promotional advertising and we are encouraged by the acceleration of growth in base testing in December .
Shifting to operational excellence in 2022, we approached our goal of 3% productivity improvements and savings through our invigorate program those savings and productivity improvements did not completely offset the inflationary pressures in our business as well as the impact of a modest modest unit price declines.
Following the pandemic, we like many companies have faced significant inflation and wage pressures, we are increasing our efforts to drive productivity and expand margins in our base business we.
We continued to drive additional productivity improvements with lab platform consolidation and greater use of automation and artificial intelligence last year, we began a new automation conversion project in our Lenexa Laboratory. This new project builds on what work we've done in our Marlboro and clipped in labs.
We've introduced a new microbiology platform that is highly automated and makes use of artificial intelligence to assist with sample analysis.
Finally, we've begun to realize savings from the Euro analysis platform conversion that we announced early last year.
Building and retaining our frontline positions continues to be a key priority for us, although we have experienced higher than average turnover in some of our job categories. We have taken actions to stabilize our workforce and improve frontline employee engagement and retention.
We expect these actions to help enhance our productivity and 2023.
We have also taken actions to reduce our SG&A by approximately $100 million in 2023, including workforce reductions of approximately one 5% primarily in corporate support functions.
With that I'll turn it over to Sam to provide more details on our performance and our 2023 guidance Sam.
Thanks, Jim.
In the fourth quarter consolidated revenues were $2 33 billion.
Down 15% versus the prior year.
Base business revenues grew six 3% to $2 15 billion.
While COVID-19 testing revenues declined 75% to $184 million.
Revenues for diagnostic information services declined 15, 3% compared to the prior year, reflecting lower revenue from COVID-19 testing services versus the fourth quarter of 2021.
Partially offset by strong growth in our base testing revenue.
Total volume measured by the number of requisitions declined 11, 2% versus the fourth quarter of 2021 with acquisitions contributing 20 basis points for total volume.
For the quarter total base testing volumes declined 6% versus the prior year.
The year over year decline was primarily related to lower employer drug testing volume and adverse weather events during the quarter, which together represented a volume headwind of more than one 5%.
COVID-19 testing volumes contributed to decline during the fourth quarter.
We resulted approximately $1 9 million molecular tests in the quarter.
This was down $1 2 million tests versus the third quarter and down approximately $5 4 million pets versus Q4 of 2021.
After rising modestly throughout the fourth quarter, our COVID-19, molecular volumes declined to an average of roughly 17000 tests per day in January.
And currently make up less than 3% of our daily volumes.
In the fourth quarter revenue per requisition declined five 1% versus the prior year, driven primarily by lower COVID-19 molecular volume.
Base business revenue per req was up six 8%.
This strong increase in revenue per req was driven by a number of factors, including test and payer mix.
The more favorable pricing environment with health plans, including incentives under our value based contracts and lower patient concessions.
Unit price reimbursement pressure remains consistent with our expectations at approximately 50 basis points in the quarter.
Reported operating income in the fourth quarter was $135 million or five 8% of revenues compared to $536 million or 19, 5% of revenues last year.
On an adjusted basis operating income was $330 million or 14, 2% of revenues compared to $579 million or 21, 1% of revenues last year.
The year over year decline in adjusted operating income is related primarily to lower COVID-19 testing revenues.
And to a lesser extent, a negative impact of adverse weather on our volume.
As well as higher investments to accelerate growth in our base business.
Additionally, in the fourth quarter, we experienced a significant increase in employee health care costs.
Reported EPS was <unk> 87 cents in the fourth quarter compared to $3 12, a year ago.
Adjusted EPS was $1 98, compared to $3 33 last year.
Cash from operations was $1 72 billion for full year 2022 versus $2 $23 billion in the prior year period.
Turning to our full year 2023 guidance <unk>.
Revenues are expected to be between $8 83 billion and nine points over $3 billion.
Base business revenues are expected to be between $8 65 billion and $8 75 billion.
COVID-19 testing revenues are expected to be between 175 and $275 million.
Reported EPS expected to be in a range of $7 61.
So $8 in 'twenty one.
And adjusted EPS to be in a range of $8 40.
To $9.
Cash from operations is expected to be at least $1 3 billion and capital expenditures are expected to be approximately $400 million.
For our 2023 guidance. Please consider the following as Jim highlighted we are now assuming COVID-19 molecular volumes to average roughly five to 10000 tests per day for the full year.
Expect volumes to continue to decline through the spring and summer, but could see a modest uptick during respiratory season in Q4.
We assume average reimbursement for COVID-19, molecular testing to continue near recent levels through the end of the phe.
CMS has indicated that reimbursement will be $51 when that expires in may.
We continue to negotiate with health plans regarding coverage policies and reimbursement for COVID-19 testing both phe.
Note that our COVID-19 testing revenue guidance for 2023 is approximately $150 million lower than the expectations. We had back in October.
With COVID-19 testing, becoming a significantly smaller portion of our overall business. We expect an earnings cadence that is more in line with pre pandemic seasonality. This year with Q1, typically being the lowest quarter of the year at roughly 22% to 23% of full year earnings.
We have also taken actions to reduce our SG&A by approximately $100 million in 2023, including workforce reductions of approximately one 5% primarily in corporate support functions. The.
The benefit of these actions will be modest in Q1 and will expand in the second quarter.
With that I will now turn it back to Jim.
Thanks, Sam to summarize we delivered strong growth of 5% in our base business in 2022, Covid testing revenues as expected declined last year and will represent a significantly smaller portion of our business going forward.
We are increasing our efforts to drive productivity and expand margins in our base business. We look forward to sharing more of our strategy during our upcoming Investor day on March 16 at the New York Stock Exchange look for an announcement soon with more details on this event.
And now we'd be happy to take your questions operator.
Thank you we will now open up for questions at the request of the company. We ask that you. Please limit yourself to one question. If you have additional questions. We ask that you. Please fall back in the queue.
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Again to ask a question please press star one.
First question on the Qs from Ann Hynes with Mizuho Securities. Your line is now open.
Hi, good morning, Thank you.
Maybe can we talk about major assumptions and the low end of guidance versus what's embedded in the high end of guidance.
And can you also discuss the incremental 115 to 125 million that is now benefiting 2023 persons when you reiterated that mid $8 range back in Q3 earnings how much has fallen to the bottom line and how much do you expect to be invest in the business. Thanks.
Yes, let me just speak first about the revenue guidance.
As we indicated in our remarks.
Our COVID-19 guidance, which had originally been 10 to 15000 requisitions per day and in in 'twenty. Three we've revised that downward to five to 10000 per day and it's really just based on the trends. We're seeing it peaked in December we averaged.
Roughly 17000, a day here in January but that's had a downward slope. So we continue to expect COVID-19 volumes to decline and Thats really had about $150 million.
Change in revenue versus what we thought last fall.
So again the guidance we've suggested.
I'd point of about $225 million.
In in Covid revenue for the year on the base business without acquisition help we've assumed a 2.5% to 3% revenue growth on the total base business. So really that's that's the explanation on the revenue side, yes, So maybe I'll add a couple of comments Ann and thank you for the question. This is.
Sam so.
You know versus what we shared back when we talked about in Q3 of 2022 around the fact that we were somewhere in that 850 range. Obviously, some positives that you mentioned, which is I think what you're referring to is the $115 million to $125 million, which includes the Pam a delay which includes also the.
<unk> of the specimen collection fees, which we now benefit from but there are a couple of things also that a change to the negative really the key one being or just one thing really that change to the negative I should say, which is COVID-19.
The Covid assumptions that we had back then where as Jim just said, 10% to 15000, a day now we're seeing volumes as we mentioned on the prepared remarks 17000, a day in January and January is typically around the peak of the.
Respiratory season, and then it starts to come down from there. So you know our expectations of 10 to 15000, a day for the year.
I would say realistic and but you know in terms of the range itself and what differentiates the bottom versus the top I think it's going to be really around the COVID-19 assumptions, but again keep in mind, we've taken COVID-19 down by 150 million in terms of total revenues versus what we really shared back in October when we expected 10% to 15, we've also from.
The benefit itself. The 115 to 125 that you referenced we've also carved out a small amount for investments in the business strategic investments that as we said.
A couple of months ago, We said, we will reserve some of that benefit to invest in the business for long term growth.
Great. Thanks.
Okay.
And our next question is from Patrick Donnelly with Citi. Your line is now open.
Hey, good morning, guys. Thanks for taking the questions.
Maybe one for you you know margins came in a little light of where we were expecting in <unk> can you just talk about the puts and takes there between DTC growth investments inflation pricing and then going into 'twenty three it seems like the base business margins need to step up you've called out the $100 million SG&A cut.
Changing any plans for DTC investments just want to get comfortable with that margin bridge from the lower for Q number and the moving pieces. Thank you.
Sure Patrick and thank you for the question. So let me talk a little bit about Q4, and the margin rate in Q4. The 414, 2%. So here are some of the headwinds some of which we were seeing throughout the year.
But obviously, we also had a drop in Covid revenues in Q4, which was significant versus Q3 at least sequentially, which impacted the margin as well, but in terms of the the margin rate itself, we had inflation I would say per expectations, but still elevated.
We had a growth investments of roughly about $40 million that impacted Q4, which were fairly in line with Q3, what we had in terms of investments so not necessarily a sequential driver one driver in Q4 that impacted our margin rate was higher employee health care costs that was higher than our expectations and some of it driven by high.
Your utilization, especially towards the end of the year after employees have met their deductibles.
But also higher cost of health care in general and so that was about 80 basis points of impact on the quarter in terms of negative rate impact. So that was another thing and I talked about obviously, if youre looking at things sequentially you have to factor in the Covid revenues were $184 million roughly versus approximately $313 million in 2000.
In Q3, so a big drop in Covid revenues now if you look prospectively in 2023 here are some of the things that obviously give us confidence that we can achieve the rate that we have in our projections and that's factored into the guidance that we gave.
We have taken a $100 million in SG&A reductions and I would say 90% of those have already been implemented now you won't see the benefits starting in Q1, you'll probably see it in the latter part of Q1.
And really taking effect in Q2 more fully but.
That's $100 million in SG&A reductions that we expect to see over the course of this year in terms of investments you referenced that.
We expect the investments to be less dilutive in 2023 versus 2022, because we start to see the benefit from some of these investments towards the growth of our business and then finally, you know obviously the margin rate is going to benefit from the specimen collection fee reimbursement that we have and we have our volume growth assumption as well.
Our revenue growth assumption that at the midpoint of the guidance ranges.
On the base business of approximately 3% and so that's going to drive also additional margin improvement based on the drop dropdown from those from those revenues.
That's helpful. Thanks, Sam.
Youre welcome.
Next question is from Jack Meehan with Nephron Research your line is open.
Thank you and good morning.
I had a few questions on quest helped so first of the $96 million you talked about of sales is there a rough breakdown you can share of COVID-19 versus base.
And then second.
On the base sales.
How did that ramp after the fall push and then finally, just what are your expectations for consumer.
Consumer initiated testing revenue and investment for 2023.
Yeah, So Jack let me start.
And C itr consumer initiated testing business totaled $96 million more of it was COVID-19 than our base business.
Our base business once we launched the new platform once we launched the marketing spend actually performed as expected.
In November and December we got significant growth year over year over 50% growth in the month of December based on.
The initiatives, we put in place. So as we've said this year, we expect that business to be less dilutive versus more versus 'twenty 'twenty. Two in terms of the total revenue projection for CIT will give you something at Investor day, obviously, the Covid will significantly ramped down, but we expect our base.
To significantly ramp up.
And we'll give you a better view of that at Investor day.
Great and then.
Then one follow up on Covid, if we do a look back on 2022 is it possible to call out how much of the sales came from serology your CDC contract or anything kind of outside of the core molecular and just what you're assuming there for 2023.
So here's.
Here's what I say.
As we indicated the volume is coming down right. We said 10 to 15 last fall. We now expect five to 10 for the year.
The one thing I'll say on serology, we had a significant.
Contract with the CDC. It was simply a test add on Cerro prevalent study that contract as expected ended in December the CDC just doesn't need that information anymore. What does remain in addition to the PCR volume is we've got a roughly $25 billion contract with the CDC to do continuous sequence.
<unk> work of the positive cases to help inform the CDC and others about the spread or the development of new.
Of new variants that continue to pop up.
Super Thank you Tim.
Youre welcome.
Next question is from a J rice with credit Suisse. Your line is now open.
Yes, hi, everybody. Thanks.
Obviously it continues to be a steady pipeline of hospital related deals can you tell us whether.
I know your closest peers announcing transactions to do you see any change in the competitive landscape for those deals on the terms on which those deals are being done and then you also mentioned.
Seeing some more activity in small regional labs.
What do you attribute that to as a COVID-19 testing is running off are you seeing some of the regional labs expressed more interest in potentially aligning with you.
Yeah.
Hey, thanks, Thanks for the question.
So I would tell you no theres no real change in the competitive dynamic in terms of pursuit of these hospital outreach deals or professional lab services types of engagements.
I would tell you is the funnel is as big as it's ever been.
We expect to close several deals here in the first half of the year. So still feel very good about that in terms of small regional labs that are out there first I'd say, there's not that many left out there that are of significant size certainly those that participated in COVID-19 testing.
And now that that volume is declining yeah. We are seeing a few raised their hands and.
<unk> put up the retirement flagging.
Potentially sell out so.
We look at each and every one of them. If we think it adds to our competitive position in a certain geographic marketplace.
I'll look at it if we don't think we need it from a competitive standpoint then.
We take a buy on those.
Okay. Thanks, a lot you.
Youre welcome.
Next question.
<unk> is from Peter Chickering with Deutsche Bank. Your line is now open.
Hey, good morning, guys. Thanks, taking my questions question is a very long track record of finding cost efficiencies through invigorate. So I'm curious, how the SG&A cost cutting $100 million compare so wouldn't it be great you usually fines in SG&A.
Most cost savings.
Like invigorate, usually done in cost of services and fixed cost leverage on volume.
Yeah. So first the $100 million cost takeout is incremental to our invigorate planned for 2023 with our invigorate plan, we targeted roughly 3% of our entire cost base for the company so call that $6 four ish billion, 3% call. It 181.
$90 million a year.
We actually got very close to that target in 2022, as we said in the prepared remarks, it did not completely offset.
Wage inflation.
And the slight price headwind that we did see along with just other non labor inflationary pressures now as we go into.
2023, we've got a full funnel of productivity ideas productivity initiatives that we're driving through the company and I would say the other thing that we think will really help us in 2023 is simply the stabilization of our workforce attrition has is it really a major impact on your productivity when.
You are constantly churning phlebotomist logistics and specimen processing, so that has stabilized its coming down we feel good about it and we feel good about the overall productivity plan in terms of offsetting inflation, which we expect to be slightly softer easier in 2023.
And we expect price all in across plus diagnostics to actually be a positive for 2023. So just at the risk of being redundant here I am still going to repeat something from what Jim said at the beginning because it's really important for your all your assumptions is the productivity improvements and the invigorate actions, which is the <unk>.
3% that we expect to get that in addition on top of the $100 million of SG&A reductions that we've already taken for the most part.
Got it and then it sort of two quick follow ups.
You talked about a phlebotomist just curious where do you <unk> hourly wage is today and kind of if you think that is sort of the right levels to compete against retail channels and second one is it public.
Lapses like companies I'm talking about pricing for a while just curious there's one large labs in the U S. What you assume for supply inflation for 'twenty, three or can you offset that inflation simply by changing vendors and are leveraging our scale.
Yeah. So.
Our phlebotomy rates.
By region of the country, what I would tell you is.
Our increase in wages for providing me, we're certainly in line with the 3% to 4% wage impact that we saw last year. It's what we're planning for 2023 and as I indicated.
Our retention has improved our attrition is has certainly stabilized into in decline. So we feel good about that.
Then on the supply inflation, just curious, yes supply I'm, sorry, the supply inflation so again.
70% of what we are.
What we purchased each year is under contract when those contracts come up they generally represent an opportunity for deflation meaning.
We're going to run a competition between the vendors and we look for improvements from a cost quality and turnaround time perspective. So.
Where the inflation hit us in 2022 is really on some of the non supplies the reagents and things like that some of that could have been pre analytical supplies masks gowns things like that as well as just the normal inflation that you all see in your businesses, which could be hotels air travel.
And things like that now again, we think that softening here as we get into 2023 and we certainly.
Put guardrails on travel and living in expenses and things like that.
Great. Thanks, so much.
Next question is from Brian <unk> with Jefferies. Your line is now open.
Hey, good morning, guys.
Just a quick question on rates from payers I think in the past you've expressed some optimism in seating.
Seeing a little bit of rate improvement on the commercial side, but I think in your prepared remarks, you called out a little bit of.
Reimbursement pressure at six basis points or so so just curious how do you know.
How do we reconcile that and maybe just broadly speaking what you're seeing in terms of payer.
Receptivity to the increasing rates.
Our reimbursement.
Yes, I think we said in the prepared remarks said, our pricing was down about 50 basis points, which actually represents.
The best that I've seen in my time with quest diagnostics. So we feel good about that we've also said that as we renegotiate new contracts and every one of these contracts is four to five years in length. So you can expect that 20% to 25% will renew the share which they will and the preponderance of those contracts we have.
<unk> rate increases at a minimum rate.
Holding rate flat to prior contracts, so we view that as a very positive.
What we've also said is look we got a 40 $35 million to $40 million rate increase through Medicare draw fees increases and today, we get reimbursed on roughly 25% of the commercial draws that we do we're going to push hard not only to expand that 25%, but those that do reimburse us to take.
Those rates up as well so we are pushing hard at.
At every turn to to increase prices across this business. The last thing I'd say is look theres a portfolio of $7 million to $800 million of other businesses in quest diagnostics that can be our exam one business our employer solutions business, our employee population population health business, and we push for 2% to 3% price increase.
Is on that portfolio of business and we've largely gotten those in place for 2023. So again. This is the most optimistic price outlook that we've put forward since I joined <unk> in 2013, yes, maybe just two.
Okay.
Maybe a couple of points of emphasis around it and.
In the prepared remarks, we talked about a price impact in Q4 of roughly 50 basis points year over year, a price headwind as we look towards 2023, what's reflected in our guidance right now is actually a positive price impact year over year and obviously that's benefited from the reimbursement of the specimen collection fee but.
It's definitely a positive we've.
We've managed to really make some good progress in terms of our pricing. The other thing I want to mention is we've talked about these value based contracts and over 30% of our health plan contracts have some type of incentive for us to earn additional value, which we actually don't put into the price equation, but.
It's really good payer mix these incentives could be based on share of of spend with quest diagnostics. It could be based on leakage. It could be based on the movement of requisitions from high priced hospital labs into laboratories like quest diagnostics. So those value based incentives are an important part of our business.
And as we succeed in achieving.
And achieving that value for the health plans, there's rewards that come back to us.
Ryan as Sean and then just one last thing I wanted to add most of the price impact that we saw in 2022 was largely driven by some of the client bill largely with the hospitals. The health plan book was actually.
Good pretty stable so.
Got it very helpful. Thank you.
Okay.
The next question is from Kevin Caliendo with UBS. Your line is open.
Hi, Thanks for taking my question.
I'm really just trying to understand all these puts and takes a little bit and I guess my first one is the $100 million of SG&A.
It's incremental is that invigorate typically offset some other inflationary pressures labor costs and the like is it $100 million incremental such that it drops to the bottom line.
Or is there other offsets there.
And two is there any change with the pricing benefit that youre talking about better pricing is certainly a tailwind I would think.
For 'twenty three so how do we think about that in terms of or is there an offset there on mix.
On the margin for basically your volume mix something to that effect.
Just trying to understand the puts and takes yes again, the $100 million. It is incremental to our invigorate plan of record and yes, it drops right to the bottom line.
In terms of.
Pricing.
No the improvement drops to the bottom line as well, we're not suggesting any other offset at this point, obviously, we had strong rep correct, both in Q4 and for the year.
<unk>.
That benefit we would put in three buckets test mix.
Was very positive for the year.
We saw.
A big surge of flu and RSV testing, along with Covid, but flu and RSV that came in Q4 that has since moderated.
And then you know our business mix was good in terms of payer mix and then finally year over year, we made nice improvements in patient concessions, so our ability to collect our ability to reduce denials and get paid for the work. We do was certainly a positive tailwind for us in 2022.
<unk>.
And if I can just ask one quick follow up should we assume in our models the $1 billion buyback get used in 2023.
No Kevin so the hundreds or the sorry, the $1 billion share authorization increase.
That's in addition to the $311 million that we currently have on the previous authorization, but you should not expect that that is what's assumed in the guidance. What we've assumed actually is that any share buybacks. We do are to offset equity dilution. So essentially the share count is roughly flat with where we are at the end of the year. So don't.
Don't assume the $1 billion to be built into the projections.
Very helpful. Thank you guys.
Youre welcome.
Yes.
Next question is from Andrew <unk> with William Blair. Your line is open.
Hey, guys. Good morning, Thanks for taking the question maybe as it relates specifically to the Covid test reimbursement with the Phe ending can you maybe just give us a little bit more detail on how those conversations with commercial payers are trending and how we should be thinking about expectations. There and then I guess just relatedly to that how are you thinking about any permanent changes to your respiratory testing.
The portfolio broadly now that we've lived through sort of three years of Covid.
Yes.
So again, CMS and we've had direct discussions with them.
Very clear that once the public health emergency and the rate will go to $51.
We are certainly expecting and driving those.
<unk> with commercial payers that we expect that rate to be $51 is while it's a new test.
It should be treated as such.
Some may have a slightly different opinion on that Andrew So that's where we negotiate in addition to that.
Theres coverage policy decisions that all need to be worked out as well asymptomatic versus symptomatic testing. So we're bullish that.
The country needs. These task commercial payers need these tests and we're going to drive these discussions in the most favorable way that we can in terms of respiratory panels, obviously with Covid is still out there it's not going to go away in 2023 when patients presented.
In the fall winter here in January with respiratory symptoms.
Some physicians ordered three tests, some physicians ordered one and then reflex to others, depending on if the first one turned out to be negative. So there were a variety of patterns.
That were out there, but we don't expect Gulf wind to go away in 2023.
So whether RSV and flu tick up like they did in 2022 remains to be seen.
And so we'll just have to see how it plays out in the late fall early winter.
The next question is from Derik de Bruin with Bank of America. Your line is open.
Hey, good morning, Thank you for taking my question.
So one quick one quick housekeeping question and then a follow up so the housekeeping question just expectations for net interest expense for the year and then how should we think and also then how should we think about.
The M&A contribution that's embedded in your revenue and your volume growth.
The 23 guide and should we still think about that 2% bogey.
As the way to look at it for going forward on the revenue contribution. Thanks.
Yes, so I'll handle the questions, but I missed the part on the expense what type of expense I'm, sorry, net interest expense.
Net interest expense, Okay, that's roughly flat I'd say year over year in terms of 'twenty two to 'twenty three Derek is the yes the.
The assumption to take there in terms of M&A, what we have assumed in our guide for 2023 is really no material prospective M&A. So essentially what's closed already what's it what was included in 'twenty three in terms of deals that have been made any outreach for instance hospital deals that have already closed in <unk>.
Two.
Those you'll see a benefit from in 'twenty three but there is no prospective M&A included so when you think about our long term target that we have talked about around 2% contribution from M&A.
Have not assumed any prospective M&A in 'twenty three on top of our base revenue growth.
Alright, so with completed M&A then what's the what's the contribution for 'twenty three.
It's not significant we're not going to give the exact contribution, but it's really not that material in terms of what we have what we have this year that carries into next year, Eric we had.
One month of Pac al because thats when closed last year and at the end of January and then the summa health and the northern lights outreach acquisitions those were those were pretty small.
Great. Thank you.
And then last question on the Qs from Elizabeth Anderson with Evercore ISI. Your line is open.
Hi, guys. Thanks, so much for the question I have a question about advanced diagnostics instead of your assumptions for 'twenty three including so does.
Contribution and then more specifically on the positive impact in pricing in any kind of incremental investments that you think specifically for 2020 three.
We will be necessary does sort of sustain that growth.
Accelerated.
So and we've talked about our investments in really three categories first consumer initiated testing, which we've covered we will that business will continue to grow on the base side of our testing and in 2023 and as we've indicated it'll it'll certainly be less dilutive than it was in 2022 the secondary.
A big area of investments has been in oncology and what we call a genomic sequencing services and really building out what we call our integrated genomics platform.
As I mentioned in the prepared remarks, we brought up a new <unk> in Q4.
Using the Illumina platform, it's referred to as the TSA 500, but it is a quest <unk> and is really important and therapy selection decisions for cancer.
We're really.
Happy about that we brought it up at our <unk> facility and we'll be expanding that to a second facility here.
Here in early 2023, so we certainly expect that business to grow.
On this integrated genomics platform.
Look the world has moved from micro array testing to whole exome to whole transcriptome and now moving quickly to whole genome testing and we expect with this platform to have a really good.
Sample to.
Complete information platform low cost high throughput really good turnaround time.
And we'll update you more about that at our at our upcoming Investor Day. The final thing is we referred to it as pharma services, which grew over 15% last year and this is quest. This has us participating in companion diagnostics, we participate in phase one clinical trials, either from a pharma company or from a CRO.
And then we do a lot of testing and validation work for our IBD partners in the industry and that business continues to grow as well so.
The last thing I'd say is look we felt really good about our growth in prenatal.
Testing this year and other rare genetic disorders. So it's a business that continues to grow in the high single low double digits for quest diagnostics.
Okay.
There is one more question that popped in the queue from Rachel net install with J P. Morgan Your line is open.
Perfect. Thanks, guys for taking the question. So first that we've previously talked about some of the uneven recovery by geography last quarter. You noted that New York City was still not play our coverage. So can you just give us the latest update on the recovery there in New York and then my follow up is just on the analyst day on March can you walk us through some of the topics. Thank you.
On hitting on any expectations for that thanks.
Yeah. So in terms of and thank you Rachel for the question. This is Sam in terms of the geography.
I think it's consistent with what we said before and let me repeat what we said.
Because we haven't seen a really.
Major change in the dynamic yet.
We are back to pre pandemic levels across and above across most geographies. The exception notable exception being the east where in New York City, I think we've seen roughly 3% to 5%.
Outflow from the city in terms of population.
Three 3% to 5% of the population, leaving the city and we haven't seen that fully come back yet even though the city is much more vibrant and there is more activity, but I don't think in terms of people coming back and getting healthcare in New York City I don't think it's back to where it was pre pandemic by any means the other thing we look at is ridership on public transportation.
As an indicator is a key metric to see how is that also coming back and it's still about 35% or so below pre pandemic levels in terms of ridership based on the last data points that we got so.
The punchline here being that the east is still lagging but everywhere else is above pre pandemic levels in terms of utilization.
Yeah, and then Rachel.
Thanks for the question on Investor Day, So I think Theres really four.
Broad topics that we're going to talk about first.
Around growth will go deep on what we're doing from an oncology and genomic.
Sequencing standpoint.
We will give you a lot more color on our consumer initiated testing business. The progress, we're making and why we continue to be excited about that and then we will also address the core part of this business, which is serving physician serving health systems and what we're doing to continue to drive growth in the in those segments.
Finally, and as always we'll address.
What we're doing to improve the customer experience and drive productivity in this business.
It's a never ending part of what we do and we continue to drive productivity and.
We will give you our plans for 'twenty three and beyond.
Finally, just as a reminder, it is march 16th it'll be at the New York Stock Exchange.
And we'll obviously provide our long term outlook as part of that is part of that session.
I'm showing no further questions in the queue.
So I wanted to thank everybody for joining the call today, we look forward to seeing you all on March 16th at the New York Stock Exchange.
And have a great afternoon. Thanks, everyone. Thank you everybody.
Thank you for participating in the quest diagnostics fourth quarter and full year 2022 conference call a transcript of prepared remarks on this call will be posted later today on quest diagnostics website at Www Questdiagnostics Dot com.
Play of the call may be accessed online at Www, Questdiagnostics dot com for slush investor or by phone at 2033693056 for international callers or 888566490498 for domestic callers telephone replays will be available from approximately 10.
30, a M. Eastern time on February 2nd 2023 until midnight Eastern time February 16th 2023 Goodbye.